IMF Executive Board Concludes 2013 Article IV Consultation with SudanPress Release No.13/387
October 4, 2013
On September 20, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Sudan.
Sudan’s economic performance in 2012 was unfavorable despite the introduction in June 2012 of a package of reforms. Non-oil real GDP growth slowed to 4.6 percent, inflation rose to 44.4 percent by the end of the year, largely driven by the monetization of the fiscal deficit and a weakening exchange rate, and the gap between the official and curb market exchange rates remained at about 20 percent by end-December. The budget posted a deficit of 3.8 percent of GDP, as a result of a significant fall in oil revenues in the aftermath of South Sudan’s secession in July 2011. The external current account deficit widened significantly to 10.8 percent of GDP, reflecting the large drop in oil exports. Gross international reserves, supported by loans and grants, however, increased to 1.9 months of prospective imports.
Economic conditions remained weak in the first half of 2013 despite some signs of improvement. Year-on-year inflation declined to 22.9 percent at end-August, in part on account of a sharp drop in food prices. Fiscal performance exceeded budget projections on account of an improvement in revenue collections and good expenditure controls—the deficit reached 1.3 percent of GDP compared with a budget target of 1.6 percent of GDP. Growth in monetary aggregates slowed significantly from the end of 2012. The gap between the official and curb market rates, however, remained at 20 percent, largely due to the uncertainty surrounding the implementation of the oil agreement with South Sudan.
The outlook for 2013 and the medium term are unfavorable, absent a new package of corrective measures. Non-oil real GDP growth is projected to slow further to 2.3 percent in 2013, and to remain below potential at about 3 percent over the medium term. Inflation would decelerate somewhat, but would remain in double-digit levels, reflecting the monetization of the budget deficit, as well as the continued depreciation of the Sudanese pound. While the overall budget deficit is projected to narrow over the next two years, mainly reflecting the impact of oil transit fees and the transitional financial arrangement with South Sudan, it is projected to widen again in subsequent years. The outlook is subject to significant risks—the main risk relates to the protracted economic and political transition in the period leading up to the 2015 presidential election and unsettled regional civil conflicts that could result in weaker growth and higher inflation.
Current economic policies have to be strengthened to reestablish macroeconomic stability and guard against downside risks. The recent agreement with South Sudan provides a unique opportunity to implement bold corrective policies. An immediate priority is to address fiscal imbalances. While most of the adjustment effort will need to focus on reducing expenditures by reducing transfers to states, and gradually phasing out subsidies, tax revenues will also need to be increased, in part through streamlining tax exemptions and rationalizing tax incentives. Monetary policy should be geared towards combating inflation; a key requirement in this regard is formulation a clear mandate for the Central Bank to facilitate its operational independence. Immediate unification of the exchange rates and greater exchange rate flexibility is crucial to facilitate the required external adjustment and to safeguard and rebuild official exchange reserves. In light of Sudan’s large stock of overdue external debt obligations, the government should work closely with South Sudan, as part of the recently signed Comprehensive Agreement, on reaching out to creditors to elicit their support for comprehensive debt relief, given the approaching deadline of the “zero option” for debt apportionment. In the meantime, closer cooperation with the IMF is important to re-establish a track record of cooperation with the IMF on policies and payments, which in due time would facilitate debt relief.
Executive Board Assessment2
Executive Directors noted that Sudan continues to face daunting economic challenges since the secession of South Sudan. Directors welcomed the measures put together by the authorities to address the imbalances but stressed that swift and steady implementation is necessary to reverse the downside trends, restore macroeconomic stability, and enhance medium-term prospects for growth. The recent agreement between Sudan and South Sudan provides a supporting environment to implement bold corrective policies, creating the conditions for a successor staff-monitored program.
Directors emphasized that fiscal consolidation, within a sound medium-term framework, is crucial. They noted that the 2014 budget represents an important step to resume the adjustment path initiated in 2012. They called for measures to broaden the tax base, including streamlining tax exemptions, rationalizing tax incentives, and taxing gold activities, while improving revenue administration. On the expenditure side, the focus should be on reducing transfers to states and gradually phasing out subsidies, while designing a better-targeted social safety net and protecting capital spending. An adequate public financial management framework will be essential to strengthen budget preparation and execution.
Directors agreed that monetary policy needs to be tightened to contain inflationary pressures. They underscored the importance of reining in monetization of the fiscal deficit, and moving towards operational independence of the central bank. Directors encouraged the authorities to improve the monetary policy framework by focusing on reserve money as the nominal anchor, and to eliminate the cap on commercial banks’ holdings of government and central bank securities. They highlighted the importance of taking steps towards unifying the official foreign exchange rates and pursuing greater exchange rate flexibility.
Directors emphasized that further progress is needed to enhance financial intermediation to boost growth and jobs as well as reduce poverty. They welcomed the authorities’ efforts to promote the microfinance sector. Directors encouraged the authorities to pursue upgrading banking supervision and compliance to best practice standards, as well as the regulatory frameworks of insurance and securities markets.
Directors welcomed the completion of the Interim Poverty Reduction Strategy Paper. They stressed the importance of stepping up reforms aimed at improving the business environment, facilitating cross-border trading, and enhancing governance to support sustained and inclusive growth.
Directors recognized that Sudan is in debt distress and the huge volume of arrears continues to hinder the country’s access to external financing, which along with technical assistance, is needed to support the reform agenda. They encouraged the authorities to work closely with South Sudan, as part of the Comprehensive Agreement, on reaching out to creditors to mobilize support for debt relief, given the approaching deadline of the “zero option” for debt apportionment. They also highlighted the need to limit non-concessional borrowing, and called for continued close cooperation with the Fund on payments and on strong economic policies, with a view to reaching an early agreement on an SMP and reestablishing a track record.